Medifast, Inc.
Q4 2012 Earnings Call Transcript

Published: 8 Mar 2013

[Operator:]

Greetings, and welcome to the Medifast, Inc. Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner, for opening remarks. Thank you. Ms. Turner, you may begin.

[Katie M. Turner:]

Good afternoon, and welcome to Medifast's Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. On the call with me today are Michael MacDonald, Chairman of the Board and Chief Executive Officer; Meg Sheetz, President and Chief Operating Officer; and Timothy Robinson, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending December 31, 2012, that went out this afternoon at approximately 4

[Michael C. MacDonald:]

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. On today's call, I will provide you with an update on our business initiatives, including areas of the business where we are seeing momentum and discuss the areas we're increasing efficiencies to improve Medifast's future growth and profitability long-term. Tim will review the financial results for the fourth quarter in more detail and discuss the first quarter and full year 2013 revenue and EPS outlook. I will then provide closing remarks, and we will open up the call to take your questions. This time last year, we communicated to you our renewed focus on driving operational excellence throughout our Take Shape for Life, Medifast Direct, Medifast Weight Control Center and Wholesale Physicians sales channels, as well as our internal support departments to better position our business for maximum profitability long-term. I'm pleased to say that in 2012, our executive team worked diligently to review and enhance our overall cost structure to further leverage our sales momentum, improve our margins and deliver improved earning results while continuing to focus on enhancing the customer experience in each of our sales channels. In 2012, our net revenue increased approximately 20% to $356.7 million from net revenue of $298.2 million in 2011. With each of the company's 3 primary sales channels, contributing to this year-over-year revenue increase. Net income for the fiscal year 2012 increased $3.1 million to $21.6 million or $1.57 per diluted share, excluding 2 nonrecurring items, including an FTC settlement recorded in the second quarter of $3.7 million or $0.27 per diluted share and a sales tax accrual of $2 million net of tax or $0.14 per diluted share in the fourth quarter of 2012, which Tim will discuss in more detail in a few minutes. This compares to a net income of $18.5 million or $1.31 per diluted share for the comparable period last year. Tim will provide details on the sales tax accrual in a few minutes. Now I will discuss each of the 3 primary sales channels in more detail. First, I'll focus on Take Shape for Life. The number of active health coaches increased to 10,200 at the end of 2012. On a sequential basis, active health coach count decreased as you've seen historically as health coaches are less likely to grow their businesses during the holiday season. Throughout the year, we worked on improving our health coach and client acquisition and retention. Our average revenue per health coach per month ended the year at $1,635 as compared to $1,555 in 2011. We are pleased with our health coach productivity as we really started to see positive results from our efforts to improve our overall Take Shape for Life performance in 2012. We successfully hosted 9 Take Shape for Life health coach events with over 6,500 attendees or over 60% of our health coaches attending one or more events in 2012. This also includes record-breaking attendance at our Take Shape for Life Annual Convention in Washington, D.C. where we celebrated 10 years of helping America get healthy. The year we focused on simplifying the opportunity for our health coaches to acquire clients and develop their businesses. Specifically, we continue invest in dedicated resources to support our field leadership team through an emphasis on training, new market development, events and incentives. It was great to see many of you at our Analyst Day in Maryland in December. You may remember, we talked about the Success from Home magazine as our latest acquisition tool. In less than 3 weeks, we sold 2/3 of our inventory. This amazing third-party publication is a strong tool to support our coaches in the promotion of their businesses in their communities. To start 2013, we kicked off January with 2 of our largest West Coast events that attracted over 3,000 health coaches and clients. At these 2 events, we introduced live stream technology, which allowed over 1,000 additional clients and coaches to attend the kickoff events virtually. The West Coast continues to be a strong market for us. We are very pleased with the enthusiasm of our health coaches at these events. In 2013, we're increasingly focused on expanding our Take Shape for Life health coach presence in all 50 states to help more clients achieve optimal health. We believe these events, along with all of our other exciting Take Shape for Life initiatives, should increasingly place Take Shape for Life in a position to experience increased momentum in health coaches and revenues long-term. As a reminder, the vast majority of our health coaches are currently or were formerly clients using our products for their own weight loss or weight maintenance needs. Approximately 94% of our Take Shape for Life product sales are shipped directly to and personally consumed by our clients, while the remaining 6% of our Take Shape for Life product sales are shipped to and consumed by our health coaches. Many of our health coaches still use our products to help in their weight maintenance. But it's important to remember, our health coaches do not receive a discount for their own product orders nor do they receive commission on Medifast products purchased for their own personal consumption. I will now spend a few moments discussing our Medifast Direct sales channel. Our team continues to effectively manage this business and strategically spend on marketing and advertising to drive sales. In 2012, Medifast Direct revenue increased 16% to $84.4 million, and we achieved a 3

[Timothy G. Robinson:]

Thanks, Mike. I'm excited to be a new part of Medifast team. For those of you I have not yet had a chance to meet, I look forward to seeing you in the coming weeks and months. So now focusing on the results for the fourth quarter of 2012. Net revenue increased 20% to $83.2 million from net revenue of $69.6 million in the fourth quarter of the prior year. As Mike mentioned, our reported net revenue for the quarter was at the high end of our guidance of $82 million to $84 million. The Take Shape for Life sales channel accounted for 62.2% of total revenue. Medifast Direct accounted for 21.8%. Medifast Weight Control Centers and Wholesale Physicians accounted for 16% of total revenue. Focusing on our sales channels in more detail, our direct sales channel of Take Shape for Life experienced revenue growth of 20% to $51.8 million compared to the same period last year. Take Shape for Life growth was driven by an increased customer product sales as a result of an increase in active health coaches and an increase in the monthly revenue per active health coach. The number of active health coach at the end of fourth quarter of 2012 was approximately 10,200, and the average revenue per health coach per month increased to $1,571 from $1,452 in the fourth quarter of 2011, which is an increase of 8%. Revenue for the Medifast Direct division increased 17% to $18.2 million as compared to $15.6 million in the fourth quarter of 2011. Due to more effective advertising message, more targeted advertising online and local radio spots and by highlighting customer successes in large national publications and on television, the company experienced a 3.2

[Michael C. MacDonald:]

Thanks, Tim. The evolution of the Medifast business model has allowed us to realize strong top and bottom line growth as well as strong cash flow generation. We believe the improvements we've made in our overall management team and also in our multichannel weight loss and weight management business model allows us to benefit from cross-channel synergies and overall more diversified go-to-market approach. We're excited about our future growth prospects in each of our 3 sales channels, and we will consistently work to make the necessary adjustments to improve our operational efficiencies and overall effectiveness across our distribution channels in 2013. In addition, we continue to believe that our vertically integrated operations and our increased capacity will allow us to continue to improve the long-term leverage of our business model for increased margin expansion and long-term profitable growth. In closing, we've come a long way in just a year, and we believe this illustrates that we're taking the right steps to best position Medifast for increased earnings and strong cash flow generation to enhance shareholder value long-term. We are pleased with our start to 2013. We're optimistic about our long-term growth prospects, and the team in place to help us achieve our goals. Now Tim, Meg and I are available to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Kurt Frederick with Wedbush Securities.

[Kurt M. Frederick:]

So I was just wondering on the $8 million ad campaign that you're running, what -- how's the timing of that fall into the quarters?

[Michael C. MacDonald:]

On the ad campaign, Kurt, we spend more money in the beginning of the year in the first 2 quarters, but it's not that different across the year. We spend a little bit more in the first 2 quarters. The one change we've made is that about $8 million is going into the brand portion of the campaign, which is the conversations campaign. And by the way, that drives all 4 channels, and we're seeing a lot more activity on the websites. And from that, we're continuing to try to focus on improving our conversion rate.

[Kurt M. Frederick:]

Okay. And you said -- I think I heard the direct marketing piece you're going to pull back a little bit in Q1?

[Michael C. MacDonald:]

Direct marketing, we've taken direct marketing down a little bit to put that into the conversations campaign overall, but it's not significant. It's a few million dollars.

[Margaret E. MacDonald-Sheetz:]

And we'll use -- we'll gauge the customer responses to those ads and decide what the future investment will be throughout the rest of the year as well.

[Kurt M. Frederick:]

Okay. And then do you have the -- what is the average revenue at the company-owned Weight Control Centers?

[Michael C. MacDonald:]

You mean current location?

[Kurt M. Frederick:]

Right.

[Michael C. MacDonald:]

I'd say about $650,000. The franchises would be around $1.1 million, Kurt.

[Kurt M. Frederick:]

$1.1 million, okay. And then just one more. On I think the last call, you had talked about like the back-office stuff that you're putting in and you talked a little bit on improved analytics and then simplified health coach acquisition. I was wondering if you could discuss maybe some of the learnings from that upgrade, and then what specifically the additional data is that is now available to you?

[Michael C. MacDonald:]

Meg, why don't you take that one.

[Margaret E. MacDonald-Sheetz:]

Yes, we've got 2 phases. We've made some incremental adjustments and changes to the way we run our back office for our coaches, but there is a bigger project still in the pipeline for this coming year into the next year to deliver a very new phase. So some of the changes that you're talking about, although slight, are just easier reporting look and feel, but the bigger changes will come later this year. But certainly, the training aspect and the coaching, helping coach our coaches to mentor others better, is all up on the coach connection sites have been improved. The way our website is functioning, that's been improved dramatically and changed. We've actually created a new MyTSFL portal, which is a great place for coaches to keep track of -- and clients to keep track of their weight loss. So those are the bigger functionalities right now that's tied into that. The off-submission back-office reporting will be later in the year.

[Operator:]

[Operator Instructions] Our next question comes from the line of Michael Halen with Sidoti & Company.

[Michael Halen:]

Just a couple of quick ones. Can you give us any color in terms of tax rate for the full year?

[Timothy G. Robinson:]

Yes, Mike, we expect our tax rate for 2013 to be around 33%.

[Michael Halen:]

Okay, great. And I know you had mentioned 40 centers in the next 2 or 3 years by some current franchisees. I was just curious if any other franchisees have joined? Or are there any other franchisees from outside?

[Michael C. MacDonald:]

Yes, Mike, right now -- right now, Michael, we've been working on completing the process called developing franchise in a box where we develop the tools to go out and market to new franchisees. Those tools will be available in the next 30 days or so, and then we'll start that marketing process. So all of the franchises that we're moving on so far won some current people. Now we're going to go out and start marketing nationally over the next 30 days as we complete the deliverables, but I want to be very sure that we have the right tools so as we engage people, we can teach them to get up the learning curve very, very quickly.

[Michael Halen:]

Okay, great. And I guess, one more. Can you talk about the when you -- I guess the timing of the new franchise centers and when you think they might open throughout the year as this is going to be something we're looking [indiscernible] back half or...

[Michael C. MacDonald:]

As we look at this year, we're looking at anywhere from 8 to 15, the weeks that we're already committed to in the U.S., and clearly, as I mentioned, the 5 to 6 in Mexico. But as we start to market this, it doesn't take that long to do these. We'll have additional centers as we get people to sign up. So that's the initial thing. We think we have anywhere from 12 to 20 already, and then we'll see what happens after we go out the market.

[Michael Halen:]

Okay. Do you expect them to be opened in the first half or?

[Michael C. MacDonald:]

I think most of those will be open in the second half. And that's one of the reasons as we do this transition, it is a major transition going from a company-owned to franchises. That's where you saw us be a little conservative on the revenue side because of that transition. We want to make sure we're not -- we want to make sure we have the right things in place so we create a good long-term sustainable business rather than move too quickly and do what we did when we're building the company-owned ones and make that same mistake again.

[Operator:]

[Operator Instructions] Thank you. I would now like to turn the call back over to management for closing comments.

[Michael C. MacDonald:]

Well, what I want to do is just say thank you very much. I appreciate everybody participating on the call. And I -- if anyone has any other follow-up questions, we would absolutely be happy to answer those over the next few days. But we thank you for your support of Medifast, and we look forward to creating greater shareholder value in the future. Thanks very much.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.